The budget proposals issued by the Hong Kong Institute of Certified Public Accountants, The Hong Kong General Chamber of Commerce, The British Chamber of Commerce in Hong Kong and The Taxation Institute of Hong Kong always provide interesting reading. Furthermore, they give a very useful overview of the business community’s wish list for the forthcoming year. For 2010, whilst the four business and professional associations may have pursued different themes, there is a general consensus that Hong Kong needs to focus on: the perceived erosion of its competitive advantage, a clear strategy for the development of Hong Kong’s future role within Asia, and the provision of assistance for SMEs and less financially secure families.
Notwithstanding the fact that there are mixed views on a number of issues, there is a clear message that Hong Kong’s legislation needs to be reviewed with regard to a number of issues, including:
- the rules for determining the source of employment income;
- the rules for determining the location of the source of corporate profits;
- the carry-back of tax losses, and
- the implementation of group relief.
Even though the Inland Revenue Department recently published a revised Departmental Interpretation and Practice Note on the question of the Location of Profits, uncertainty and disagreement remain as to the legal correctness of its contents.
Equally, the proposals for loss relief are consistent with those submitted in past years; they have been met with resistance from the Financial Secretary on the basis that such legislation will give rise to a loss in revenue, complex tax law and the use of tax-avoidance arrangements. All these can be resolved if there is now a willingness to do so.
Although there are differences of opinion as to whether the standard rate of profits tax and salaries tax should be reduced, the same cannot be said about the concept of providing assistance to SMEs in the form of a small companies rate of profits tax. This is unlikely to cause a significant loss in tax revenue, as the larger corporations pay the majority of profits tax collected, i.e. the top 1,200 corporate taxpayers contributed 72.6% of the profits tax collected in 2007/2008.
There are many other proposals, all of which are credible, ranging from accelerated relief for expenditure on green buildings, the implementation of transfer pricing legislation, deductions for private medical contributions, incentives for Hong Kong’s fund management industry, a comprehensive review of the legislation dealing with intellectual property, increasing Hong Kong’s double taxation treaty network etc. etc.
There is no doubt that the Financial Secretary would like to please all sectors of the community, but the question remains: How are such incentives to be funded? Even though there may be better-than-expected collections from Stamp Duty and Land Premium, turning a HK$39.9bn deficit for 2009/10, as predicted in the Medium Range Forecast, into a budget surplus will require significant improvements in all aspects of the Government’s income and expenditure. Even though the Government has very significant financial resources, the Financial Secretary is unlikely to implement proposals that are likely to erode the Government’s reserves. Sadly, the proposals do not consider ways of increasing revenues, but merely suggest that the Government should review the opportunities to widen Hong Kong’s tax base. Seeing that repeated attempts to introduce a sales tax have been thwarted, this may prove difficult. However, there are a number of proposals that are tax-neutral and that should be evaluated and debated.
